Lack of fiscal discipline in public sector departments and organisations has become a major cause of the widening mismatch between revenue generation and expenditure, which lies at the root of almost all financial problems of Pakistan, be it the power sector's circular debt or non-payment to Pakistan Contractors Association for the work they have already completed.
The Pakistan Contractors Association has now warned the NHA that if the amount of Rs 17 billion it owes to PCA is not cleared by February 28, work on all its ongoing projects would be stopped - a warning that needs to be taken very seriously. Suspension of work by NHA will hit the economy really hard, as infrastructure is already the most neglected sector of Pakistan's economy. The dues NHA owes to PCA include Rs 11 billion for new roads and Rs 6 billion for maintenance of the existing roads.
The contractors have rightly argued that they had won the contracts after going through a tough competitive bidding process and it would be a breach of contractual obligation if they were not paid for the work they have already completed. PCA has requested the president, the prime minister and the federal communications minister to take a serious view of non-payment of dues and non-acceptance of bid security and performance security offered by the bidders in the shape of insurance bond, as laid down in PEC Standard Form of Bidding Documents approved by ECNEC.
They have further argued that contractors have to borrow money from banks and other financial institutions at high interest rates, which they have to pay back within the stipulated timeframe. The facility of furnishing bid security in the form of insurance bond is meant to enhance capacity building of contractors, as they do not command unlimited resources to offer as collateral to financial institutions. The argument is sound enough.
Corruption, misuse or overuse of allocated departmental budgets has come to be accepted almost as a norm over the years, with the political and non-political high-ups enjoying expensive perks and privileges which the exchequer of this debt-ridden country cannot afford. Unfortunately, the public sector has become a "dumping ground" to accommodate favourites and relatives of those who matter. This has become a snowballing financial liability.
Approval of cost revisions of delayed or deferred projects, though due largely to the inefficiency of the government's own departments and agencies, seems to be becoming a routine matter. The tendency has contributed towards creation of numerous "white elephants," and ironically, an iron-clad justification for privatisation of inefficient entities.
The problem is assuming a cyclic character. Those opposed to this policy have rightly termed it as selling of the "family silver" at throwaway prices, of which the most blatant example was the privatisation of Pakistan Steel. Lavish spending by political and non-political elite and their staff has become a burden on the resources of the departments they head. The circular debt of the "cash-bleeding" power sector is said to be a typical instance.
It has apparently taken the super-flood's devastation, the refusal of international community to extend the level of assistance we were expecting and above all the PML-N's 45-day ultimatum that we have agreed at last to make the federal cabinet "lean and mean" in compliance with the 18th and 19th Amendments, which fix the cabinet strength at 11 percent of parliamentary strength.
The step will, hopefully, lead to reduction in government expenses. Debt-servicing alone accounts for 70 of the entire expenditure, while foreign debt has long crossed the $56 billion mark. Parliamentarians and other stakeholders so far have resisted attempts to widen the tax net from the current ratio of around 9.5 percent to around 15 percent. The easiest way out has been to levy indirect taxes, which hurt the common man more than the stakeholders.
Public sector investment in infrastructure is said to have gone down as percentage point of GDP since the start of 2000. A World Bank study has identified paucity of infrastructure in water, power and transport sectors as the main cause of Pakistan's economic backwardness. Another cause has been the rising cost of doing business in Pakistan.
According to one estimate, as many as 632 projects worth Rs 2.36 trillion were approved by the Musharraf government in eight years, and the tendency continues to a lesser extent. The slashing of PSDP under financial squeeze will make sense only when there is an all-round tightening of the belt. Stopping payment to contractors may generate another "circular debt." The government needs to arrange funds for making payment to PCA at the earliest by cutting down all non-development expenditure. There is a need to strike an informed balance in development and non-development expenditure.